The David Aaron Partnership, a leading UK firm of independent financial advisers (IFA), has gone into administration following mis-selling claims made against the firm. What happens if your IFA gets into difficulties?
Help! My IFA has gone into administration. Will I lose my money?
You shouldn't as the IFA acts as an intermediary, selling the investment rather than managing it.
In short, if you have bought a pension, unit trust or opened a deposit account through an IFA your money is safe.
Your contract is with the bank, insurance company or investment house which manages your money, and if they get into difficulties there is a scheme in place that can help.
What sort of scheme?
All licensed UK financial firms pay into the Financial Services Compensation Scheme (FSCS).
Under the terms of the scheme a claim against an investment firm is limited to £48,000 - 100% of the first £30,000 and 90% of the next £20,000.
What if there is potential mis-selling involved?
This is exactly the position facing the 30,000 clients of the David Aaron Partnership.
Substantial numbers of the IFA firms clients bought so-called "precipice bonds."
These bonds offered a high rate of return. But, if the underlying investment, often a stock market index like the FTSE 100, fell below a certain level, investors could end up losing most or all of their capital.
Some of these people have lost substantial sums and are claiming that they have been mis-sold.
The Financial Services Authority (FSA) estimates that about 250,000 people in the UK invested £5bn in precipice bonds.
What will happen to the mis-selling claims now?
Once an IFA firm is deemed by the FSCS to be in default, clients who say they have been mis-sold can lodge a claim with the compensation scheme.
If the FSCS deems the investor has a case for a mis-selling claim, compensation can be triggered.
On past experience investors could face quite a wait before they get compensation.
Last November, RJ Temple, an IFA firm, defaulted following claims over precipice bond sales.
The FSCS reckons it will take six months to sift through all the cases from this firm alone.
Could more IFAs get into difficulties?
An administration expert has warned of future problems within the industry.
What is more, the sale of precipice bonds is the latest in the long line of scandals to hit the UK financial industry.
Many financial advisory firms are still busy dealing with claims that clients were mis-sold pensions and endowments.
IFA firms are supposed to have insurance in place to cover mis-selling claims.
As a result, premiums are rocketing and there is growing evidence that some firms can not afford cover, and are letting their insurance lapse.
How does this procedure differ for a claim against a fully-functioning IFA firm?
The first port of call is the firm that sold the investment.
If lodging a complaint with the company fails, the investor can take their claim to the Financial Ombudsman Service (FOS).
The Financial Ombudsman can order firms to reimburse an investor in full.
There is more details about lodging a complaint on its website, see link on right.